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U.S. Job Growth Continues; I Have New Worries

The U.S. economy is back on track. The Labor Department released March numbers that included adding 216,000 jobs beating the forecast of 193,000 jobs and reducing the unemployment rate to 8.8% from February’s 8.9% level. We all want greater declines but that doesn’t happen over night.

Having shown job growth the last several months, prognosticators have changed hats and are now worrying about the durability of the recovery. There is certainly enough to worry about too. Oil production coming from a suddenly volatile Middle East leads the concerns.

Transportation costs are escalating thanks to rising gas prices now approaching four dollars per gallon. Jet fuel, diesel and other liquid transportation fuels’ prices are tethered to gas prices since they all come out of the same barrel of petroleum — so do the costs of fertilizer, rubber, plastics and a lot more. Higher prices can easily raise the cost of most business inputs from travel to raw materials and that could choke off a recovery, so the concern is real.

Something you might not be aware of. According to the International Energy Agency’s homepage world oil supply is about two million barrels per day short of demand. High demand drives prices. Interestingly, world oil production has never reached the 90 million barrels per day (mb/d) now in demand. If the oil producers cannot fill that gap or if the gap widens — and demand will certainly escalate as the global economy recovers — we might see energy induced economic upheavals.

We saw the results of energy driven economic decline in the 1970’s largely driven by producers withholding product from the market. That’s not the case today as the producers are pumping all they can.

World Oil Supply, Source: IEA

Of course, we will need to wait and see how energy affects business. But unlike the 1970’s there are many new technologies, especially in the front office that will help blunt the impact of escalating travel costs to the SG&A line. This could all be relatively good news for the CRM community.

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You should read Thomas Sowell’s new/revised book, “Basic Economics”. In it he claims that in the 1970’s oil crises, producers didn’t withhold supplies. He claims it was “artificially low” price controls imposed by the Nixon administration and maintained by the Ford and Carter administrations that caused the problem. He also points out that gas stations were selling 95-97% as much gas in two hours per day of being open during the “crisis” than during an entire day before the crisis. Finally he points out that it wasn’t full oil tankers circling the globe, that took gas out of the market, it was the aggregate of individual drivers with half-full tanks constantly topping off that took a significant percentage of gas out of circulation.

This sounds like revisionist history. Remember the Embargo? Who made that term up? Didn’t the Arabs say they were going to withhold supply to nations that supported Israel? Remember how the Dutch had to go back on their support of Israel in order to keep getting fuel for their homes? Didn’t the US have to give the Dutch some assistance? I recall the Nixonian price controls but another thing happened in the 1970’s. The US went from a net oil producer to an importer. We hit Peak Oil at about 9 million bbl/day and today are down to about 4-4.5 million — the same production as in 1942. OPEC tried to find its political muscle at that point and partly succeeded.

Topping off was the new sport of the day and I remember it. Eventually new sources from the North Sea, Cantarell (Gulf of Mexico) and Alaska all increased supply but all those fields are in decline today. Cantarell is declining at 11% per year. Alaska pumped less than 600,000 bbl/day last year down from almost 2 million/day at peak. There are precious few new fields being found — the peak oil discovery year was 1964, it’s been declining ever since. Today we use 7-8 bbl for every one we find. We’re running out and we need a new strategy, a new paradigm for moving around and for making things.

Hope you are well. I am in SF next week and returning several times this quarter. Hope to see you one of those times.